Focus on customer price acceptance: How to take advantage of demand-oriented pricing to achieve success

The price is right. Even the owners of your old corner store changed product prices based on supply and demand. If they had a lot of cauliflower left to sell in the afternoon, they adjusted the price accordingly to stimulate demand.

Since the existence of money, price has been a major lever for the success of a company. Determining the optimal price for each product is no easy task for retailers. Many factors, including inventory, seasonality, purchase prices, competition and demand, are incorporated into the pricing process. It is virtually impossible for one person to determine and manage the many parameters for thousands of products in order to optimally control the prices for the entire range.

Software for dynamic pricing, designed to automate prices and calculate them dynamically, can be a valuable support. If 40% of online and mail order retailers in Germany relied on dynamic pricing in 2015 (Bundesverband E-Commerce und Versandhandel Deutschland e.V. (bevh)), there are far more online retailers using it in 2018. Retailers attribute increasing importance to the topic of dynamic pricing, not lastly thanks to Amazon and its millions of price changes every day. We at prudsys have also observed a great increase in demand for our dynamic pricing solutions over the past two years.

Many systems for dynamic pricing control prices driven by costs or based on competition. However, if you only focus on competition you may soon experience a price drop that spares nobody. To effectively counter this risk, prudsys relies on demand-oriented pricing. The great advantage here is that costs and competition are both taken into account but are ultimately only two of many factors. Our AI-based pricing solution weights different influencing factors as regards the corporate strategy and then calculates the optimal price.

What is demand-oriented pricing?

Demand-oriented pricing – as defined by Marketinglexikon.ch – “is predominantly based on the market and more precisely on the potential buyers. In other words, the goal is to find out what price the buyer of a product or service is willing to pay.“ (http://www.marketinglexikon.ch/terms/321) For us, that means that a pricing solution automatically determines and processes all of the demand indicators: every purchase, every click, every product on the wish list, a like for a product on Facebook or the geo-location of an interested customer are all included in the modelling of the demand functions. Retailers must know the demand function of the product in order to know how the demand for a product changes should the price rise or fall. This knowledge is then crucial when estimating whether a product has high or low price sensitivity.

The price image, in other words whether the retailer is perceived as expensive or reasonable, is a particularly important factor for the retail sector. For some products, e.g. in grocery retail, most customers are familiar with the price: When it comes to Nutella, champagne or even coffee, consumers can react in a price sensitive way. For these products, also known as base price or price focus items, the retailer is constantly striving, if at all possible, not to exceed the price acceptance threshold of the customer.
In the case of base or products subject to price skimming, the behavior is different: Thanks to lower price sensitivity, retailers have more freedom with pricing as these prices are not necessarily etched in the memory of the consumer. This potential is still used too rarely in practice.

The retailer must thus always pose himself the question: What is a reasonable price that does not exceed the price acceptance of the customer while at the same time being sufficient for his own business?
The answer is demand-oriented pricing. A good pricing solution measures customer reactions to prices in real time, recognizes the price acceptance threshold and includes this information immediately in further price calculations. The solution recognizes what the product is worth to the customer at a certain point in time and at the same time takes into consideration many other factors, e.g. cost or seasonality. This way it draws the right conclusions about how the price has to look in order to get the optimal result for the retailer.

Demand-oriented pricing for the respective pricing strategy

Bearing in mind the demand, our pricing solution calculates the prices for the entire product range in the context of the respective pricing strategy. Our customers frequently use the following pricing scenarios:

  • Regular price optimization: They increase demand-oriented turnover and earnings through intelligent price optimization. For more information read this blog article.
  • Markdown pricing: Thanks to demand-oriented pricing you can reduce markdowns for fresh and seasonal items while keeping the raw earnings high on the product level. More on this in this article.
  • Intelligent couponing: Use personalized coupons to increase customer value, always focusing on current customer interest. More on this in this article.

Are you interested in using demand-oriented pricing to optimally control prices? Book your personal web session with prudsys now.